In Depth: China Bad-Debt Managers’ Bet on Bank Stocks Could Backfire

In recent years, China's four major state-owned asset management companies (AMCs)—China Orient Asset Management, Citic Financial Asset Management (formerly China Huarong), China Cinda Asset Management, and China Great Wall Asset Management—have shifted their investment focus from their traditional core business of distressed debt to acquiring significant stakes in commercial banks. This new strategy, initially meant to shore up bank balance sheets amid a prolonged real estate slump, has transformed the AMCs into major shareholders in institutions like Shanghai Pudong Development Bank and others, allowing them to nominate directors and wield greater influence. The AMCs’ profits have recently surged, largely due to rising valuations of their bank holdings combined with favorable accounting practices, rather than from resolving bad debts—the sector’s original mission[para. 1][para. 2][para. 3].

The trend began in earnest in 2022 when policymakers encouraged AMCs to act as stabilizing “white knights” for banks. Citic Financial led the way by converting China Everbright Bank’s convertible bonds into equity and, in 2024, enjoyed substantial paper gains as bank stock prices rebounded. These gains triggered a wave of similar bank investments by other AMCs, which now treat these purchases as “special opportunity investments” that are rare and often require high-level approval. Citic Financial holds 7.9% of Everbright Bank, 4.7% of Bank of China, and 9.9% of Citic Ltd.; Great Wall owns over 3% in China Construction Bank and China Minsheng Bank, while Cinda and Orient have built comparable positions in SPD Bank. Most AMCs have also secured board seats, except at China Construction Bank[para. 5][para. 6][para. 7].

Driving this pivot is the continued weakness in China’s real estate market, which traditionally underpinned distressed assets and now weighs on AMC profits. The recent rebound in bank stocks presented a more lucrative investment alternative[para. 8]. The impressive profits are partly derived from the accounting practice known as the "equity method," which allows AMCs with board seats to book investments at book value. As many bank stocks trade below book value, AMCs can recognize immediate, substantial paper gains. For instance, Citic Financial’s 2024 net profit hit 9.6 billion yuan, up 53.5%, with 72.4% of its 107.4 billion yuan in revenue coming from equity-method gains, primarily from holdings in major banks[para. 9][para. 10]. This method incentivizes AMCs to secure bank board seats and reinforces the focus on equity investment gains[para. 11].

However, analysts warn that these headline profits mask significant systemic risks. If bank shares drop or market conditions tighten, AMCs could see tens of billions of yuan in potential losses, as their balance sheets are heavily exposed to swings in bank stock valuations. Regulatory authorities had previously been urging AMCs to divest noncore assets and focus on resolving distressed assets, but the new strategy diverts capital away from their original remit. Unlike debt assets, bank equities carry risk weightings as high as 250%, further increasing vulnerability. A modest 20% drop in bank share values could wipe out AMC profits and threaten compliance with regulatory capital requirements[para. 12][para. 13][para. 14][para. 15].

Additionally, many AMCs finance their equity investments with short-term debt, creating funding mismatches should liquidity dry up. Given their large stakes, a cash crunch at one AMC could ripple through the broader financial system, with S&P Global warning of contagion risks when AMCs own significant shares in financial institutions. Experts urge regulators to enforce clearer limits on such investments, focusing AMCs back onto their core distressed-asset management role[para. 16][para. 17][para. 18][para. 19].

[para. 1]